DL | davianletter.

com

Sugar No.11 Focus

Friday, April 30, 2010

Dan Shy dan.shy@davianletter.com Philip Dunham philip.dunham@davianletter.com

Sugar No. 11 (Daily)
35

30

In Focus:
Looking for a base to form. Approaching seasonally bullish period Supply/Demand picture still tight, but 2009 rally was over-extended

25

20

15

10

5

Source – eSignal, TDL Research

The reason for this interest has to do with the tremendous rally we say in the price of sugar from the 14 cent region in May of 2009, to approximately 25 cents by February of 2010; one of their highest levels in history. (Sugar prices had soared to 65 cents in the 1970s) From February 2010 to date, prices have collapsed back down to the 17 cent region. The unusual movements have sparked many questions amongst traders. What led that explosion in the price of the commodity? What is the reason for the collapse in recent weeks?

1

For the purpose of this research report, when “Sugar” or the “Sugar market” is mentioned, this is referring to Sugar #11 as traded on the Intercontinental Exchange (ICE). Sugar No.11 Focus P a g e |1

TDL Research | Sugar No.11 Focus

Sugar. That tiny, sweet crystal has been transformed over the past 1,000 years from an expensive luxury item available to a select elite in a tiny corner of the world, to the indispensable commodity with tremendous implications to the world economy that we know today. Sugar is used in the soft drinks and beers that are bought around the world, in tea and coffee by hundreds of millions people each morning. It is used in cereals, jams, candies, ice cream, puddings, syrups, cocktails and a myriad other uses. Action within the Sugar market 1 for the last year has garnered wide attention from many quarters as of late.

DL | davianletter.com

Fundamental Picture
Nearly eighty percent of all sugar in the world comes from the cheaper to produce Sugar Cane, with the remainder coming from other sources such as sugar beet. In addition, it is important to remember that simply because a country may produce a particular tonnage of sugar for a given year, this does not mean that it will export this same tonnage. The majority of all sugar that is produced by a nation, will also be consumed by that nation. The remainder of it's sugar crop is then distributed for trade on the world market.

Friday, April 30, 2010 Sugar No. 11 Exchange: Intercontinental Exchange (ICE) Contract Settlement Size: 112,000 lbs Contract Months: March (H), May (K), July (N), October (V) Tick Size: 0.01 = $11.20 Daily Limit: None

When it comes to the commodity futures markets, the countries that demand the greatest amount of attention in the sugar markets are that of Brazil and India. Of course, other countries such as Pakistan, Thailand, and Columbia contribute greatly to the production and consumption figures. However, the sugar market has been driven by news coming out of Brazil and India regarding the sugar cane crops. In India, this area of harvest actually decreased from 2007 to 2008. At the same time, there is a continuing narrowing gap between consumption, and production. Sugar Cane Planting(Area of Harvest) Brazil 2007 2008 8,141,135 Hectares / 20,117,182.697 acres 5,055,200 Hectares / 12,491,671.243 acres 2009

7,080,920 Hectares / 17,497,334.377 acres India 5,150,000 Hectares / 12,725,927.145 acres Source – Food and Agriculture organization of the United Nations

4,653,884.885 hectares / 11.5 million acres

2009 - According to the Brazilian Sugarcane Industry Association (UNICA) for the recent 2009 planting year ... “ … satellite images of South-Central Brazil, indicate that there was no significant expansion of the cultivated area in traditional sugarcane regions ...” published by UNICA on Friday, April 2, 2010. Sugar Cane Production(metric 2007 2008 2009 tonnes) Brazil 549,707,328t 514,079,729t 541,500,00t India 355,519,700t 348,187,900t 310,000,00t Source – Food and Agriculture organization of the United Nations, Brazilian Sugarcane Industry Association (UNICA)

In Brazil, the dependent factors for an increase in the production of sugar … “... can be attributed in part to a significant volume of “bisada” cane (sugarcane that was not processed in the last harvest, therefore growing for nearly two years) and to a lesser extent the gradual increase in production at new mills, especially in the states of Mato Grosso do Sul, Goias and Minas Gerais” - published by UNICA on Friday, April 2, 2010. It should therefore be noted that UNICA has stated that, a) there is no increase in the harvest acreage, and b) no increase of production mills.

Sugar No.11 Focus P a g e |2

DL | davianletter.com

Recent Fundamental Impact

Friday, April 30, 2010

2009 saw one of the biggest runs in sugar since 1979-1980 as prices soared roughly 155% from $0.11/lb to $0.28/lb. However, this was merely a continuation of the long term up-trend established in 2004-2005. The rally was fuelled by falling production in India, the world’s largest consumer and one of the largest producers of Sugar, due to poor monsoon rainfall affecting sugar cane harvests. (Source for following timeline – Financial Times) • January 20, 2009 – prices rise from lows of $0.1050/lb as signs emerge that India and the EU would be importing more sugar than the market had been pricing in. April 8, 2009 – prices rise as reports begin to surface highlighting drop in Indian Production. – Financial Times April 14, 2009 – India cuts import tax as concerns increase around Indian production deficit as well as lower production than expected in Pakistan, Iran and European Union. April 30, 2009 – prices reach and exceed 2008 highs as expectations of India’s production deficit continue to surprise worse than expected. May 14, 2009 – in addition to production problems in India, smaller Brazilian sugar mills struggled to find credit to post margin to sell forward and hedge production, therefore eliminating natural sellers that would have otherwise helped hold down prices. May 27, 2009 – Indian regulators throw the market a curve ball by restricting futures trading in new contracts. This action ultimately introduced more uncertainty to the market. June 24, 2009 – prices begin to move into parabolic territory as weather services reduce Indian monsoon rainfall estimates. September 2, 2009 – Indian central bank voices concerns over inflation, as well as easing production concerns send sugar prices lower. September-November, 2009 – prices consolidate as market digests Indian authorities’ attempts to reign in prices. December 14, 2009 – prices break 3 month trading range as Asian countries look to buy sugar to cover domestic shortages. January, 2010 – Prices extend their 2009 trend higher reaching intraday highs slightly above $0.30/lb as traders expected more Asian countries to buy sugar to cover domestic shortfalls. February, 2010 – Prices begin to drop from record levels as meteorologists forecast El Niño to fade and normal rainfall to return. February 23, 2010 – prices fall further as the realization that high prices have impacted demand sets in. March 4, 2010 – news that the Philippines would postpone or cancel plans to import 134,000 tonnes of sugar send prices further down. March 13, 2010 – more reports surface that India and Pakistan would follow the Philippines in postponing sugar purchases as production outlook improves. April, 2010 – Prices stabilize at $0.16/lb as Pakistan is reported to be looking to import 200,000 tonnes, Russia is planning to lower import tariffs and Brazil’s harvest is disrupted by rain.

• •

• •

• •

Sugar No.11 Focus P a g e |3

DL | davianletter.com

Previous Historical References

Friday, April 30, 2010

Sugar has seen such explosive rallies before in its history, and it would be good to examine how the market reacted at that time, to gain some historical perspective. Naturally, the sugar market has changed somewhat since that time in terms of modern production methods, harvesting, and demand. However, after such an explosion in the price of Sugar, it is of interest to note how the market reacted after such explosions in price. For human nature changes little over time, and it is an examination of how human psychology, as manifested in the market that we believe to be of interest at this time. Sugar No. 11 1972-1981 (Weekly)

65

55

45

35

25

15

5

Source – eSignal, TDL Research

Sugar prices, historically speaking, do not hold onto their highs before completely collapsing. For example, from 1972 to 1974, Sugar prices steadily climbed to their all time high of 65 cents, before quickly collapsing to between 10 cents by 1976. Just a few short years later, the price of sugar skyrocketed, and by 1980 had reached a high of 45 cents. Almost immediately, the sugar market began to collapse, and reached 5 cents by 1981.

Sugar No.11 Focus P a g e |4

DL | davianletter.com
Friday, April 30, 2010 By January 1982, the price of Sugar had exploded once again to a high of 14.10 cents. Then, as in 2010, the price of Sugar collapsed throughout the first quarter of 1982. There was a rally that lasted until approximately August (a notoriously weak period for sugar), or two months. Sugar No. 11 1981-1987 (Weekly)

37 32 27 22 17 12 7 2

Source – eSignal, TDL Research

After this August low, the Sugar market rallied once again for the next eight months until putting in another high of 13.47 cents. Although the fundamental picture had changed so as to produce record tonnages of sugar, the market was quick to once again play up the sympathetic rally to new highs. A pattern emerges in which the market is quick to explode to new highs, and quickly collapse. Subsequent to these 'bubbles' in sugars price, the market usually places a 'sympathetic' rally, as fundamental fears linger in the markets consciousness. With the recent water shortages in India, it would be reasonable to expect that recent fundamental factors will remain in the collective consciousness of the market during the upcoming seasonally bullish time period.

Sugar No.11 Focus P a g e |5

DL | davianletter.com

Commitment of Traders
ICE Sugar No. 11 (Weekly) & Commitment of Traders (Disaggregated)

Friday, April 30, 2010

35

1400000
30

900000

25

400000

20

15

-100000
10

-600000
5

-1100000

0

Producer/Consumer Long Managed Money Net Position SB

Producer/Consumer Short Total Open Interest

Swap Dealer Net Position Non Reportable Net Postion

Source – eSignal, CFTC, TDL Research

TDLR subscribers will be familiar with commitment of traders data, a review of which is published weekly in the TDLR chart book. The data is used to identify shifts in trends based on long/short positions of different categories of traders. As of September 2009, the CFTC began publishing disaggregated data which separated the previous two major categories, commercial and noncommercial into four categories, Producer/Consumer/Merchant, swap dealers, managed money and other reportable traders. Generally, producers are net short to hedge their output, while consumers are long to hedge their consumption if prices are rising Beginning in March of 2008, producer/consumer short positions peak and trend lower. While the trend higher for prices did not start until roughly a year later, this was a sign of support forming. Through the rest of 2008, producers/consumers and managed money reduced long positions while prices remained rangebound. January 2009 was the first time since September 2008 that managed money began to increase net long positions. Around the same time, producer/consumer short positions began to level out and then increase as producers hedged their output. The trend higher in prices accelerated once producers/consumers began increasing long positions. The 2010 selloff in prices was a result of producers/consumers and managed money reducing long positions. Since March 2010, producer/consumer and managed money long positions have stabilized as prices have found support around $0.16/lb. Going forward, we are looking for signs managed money and producers/consumers are increasing long positions.

Sugar No.11 Focus P a g e |6

DL | davianletter.com

Seasonal Tendencies
“Bottoms are a process, they are not an event” - Market Mantra

Friday, April 30, 2010

At this point, it is best to examine the seasonal tendencies for the Sugar #11 market in the near future. To do this, we consider mean seasonal prices for Sugar #11 as compiled by Moore Research Center, Inc. This data shows that the final seasonal bottom tends to occur at the end of April, or the beginning of May each year for the July contract. Sugar No. 11 Seasonality (Weekly)

145 140 135 130 125 120 115 110 105 100 95 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 Average 1972-2009 Average 2004-2009 Average 2003-2008
Source – eSignal, TDL Research A seasonal bounce is not to be discounted that typically begins near the 15th of April each year. However, this bounce is usually only part of the larger bottoming process. Typically, seasonally … the market retreats at the end of April, and then begins to a stronger rally sometime in the first half of May each year for the July contract. Considering the complete collapse that the sugar market has recently experienced, we do not think that it would be surprising to see such a 'sympathetic' bounce that marries technical moving average deviations with this seasonal tendency. This would also harmonize well with the typical historical pattern of this market. Of course, the past twelve months has been anything but typical in the Sugar market. Yet seasonal tendencies are of note, or at least a variable to consider, when considering technical entrances into any market.

Sugar No.11 Focus P a g e |7

DL | davianletter.com

Strategies & Outlook

Friday, April 30, 2010

“All men can see these tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved. “ Sun Tzu, the Art of War As of writing, the downward trend from January is still intact. However, seasonal dynamics are showing signs of returning. We had experienced a sharp sell off since February of this year. Once prices reached support around $0.16, technical traders were drawn into the market, believing a retracement to the 18 or 19 cent region was in order, and thus, to begin buying in. Mid April typically sees a selloff in the Sugar market, this seasonal tendency held, pushing prices below $0.16, shaking out weak long positions. Fundamentals support a relatively tight supply/demand picture, albeit not on the scale of 2009. For the next few weeks, we are looking for signs of base building. If the seasonal market tendencies throughout the next three months, a market neutral approach could be used until approximately May 7th. After which, a bullish stance may be called for. Sugar No. 11 July Contract (Daily)

26

24

22

20

18

16

14

Source – eSignal, TDL Research

Sugar No.11 Focus P a g e |8

DL | davianletter.com

A note on tradable instruments

Friday, April 30, 2010

The sugar market is typically one of the more liquid of the commodity markets, making the assumption of risk over contracts a rather simple process. In addition, Barclays Bank PLC iPath UBS Sugar Total Return ETN has become available which lately has offered greater liquidity than the actual commodity contracts. However, ETN's come with their own unique aspects, risks and behaviors. ETN's are in essence, debt instruments, and it is in this structure that they differ from ETF's. In addition, there are also options available for the actual commodity contracts, although the volume for these options is extremely low. For the active July contract, volume of 26 to 13 is not unusual on near the money options. However, put options on months with approximately 50 days until expiration usually have enough volume to be considered sufficiently liquid for a hedge against any long positions.

Sugar No.11 Focus P a g e |9

DL | davianletter.com

Disclaimer

Friday, April 30, 2010

This Publication is protected by U.S. and International Copyright laws. All rights reserved. No license is granted to the user except for the user's personal use. No part of this publication or its contents may be copied, downloaded, stored in a retrieval system, further transmitted, or otherwise reproduced, stored, disseminated, transferred, or used, in any form or by any means, except as permitted under The Davian Letter subscription agreement or with prior written permission. Anthony Davian, Davian and Company, LLC (“Company”), Davian Capital Advisors LLC, Davian Capital L.P (“The Fund”), The Davian Letter, and davianletter.com are not an investment advisory service, nor a registered investment advisor or broker-dealer and do not purport to tell or suggest which securities customers should buy or sell for themselves. The analysts and employees or affiliates of Company may hold positions in the stocks or industries discussed here. You understand and acknowledge that there is a very high degree of risk involved in trading securities. The Company, the authors, the publisher, and all affiliates of Company assume no responsibility or liability for your trading and investment results. Factual statements on the Company's website, or in its publications, are made as of the date stated and are subject to change without notice. It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results of any individual trader or trading system published by Company are not indicative of future returns by that trader or system, and are not indicative of future returns which be realized by you. In addition, the indicators, strategies, columns, articles and all other features of Company's products (collectively, the "Information") are provided for informational and educational purposes only and should not be construed as investment advice. Examples presented on Company's website are for educational purposes only. Such set-ups are not solicitations of any order to buy or sell. Accordingly, you should not rely solely on the Information in making any investment. Rather, you should use the Information only as a starting point for doing additional independent research in order to allow you to form your own opinion regarding investments. You should always check with your licensed financial advisor and tax advisor to determine the suitability of any investment. All materials, both on and from this site, and newsletter, are for entertainment purposes only and are provided on an "as is" basis and without warranties of any kind, either express or implied. The ideas, opinions, and information provided here do not necessarily represent those of The Davian Letter or davianletter.com. The Davian Letter and davianletter.com does not guarantee that the information contained herein or distributed from this site will be uninterrupted or error-free, that defects will be corrected, nor that this site or the server that makes it available are free from viruses or other harmful components. The Davian Letter and davianletter.com does not warrant or make any representations regarding the use, or the results of the use, of the materials in this site in terms of their correctness, accuracy, reliability, profit, or otherwise. As the user of this or any information provided by The Davian Letter or davianletter.com, you assume the entire cost of all necessary servicing, repair or correction. The materials and information in and provided by this site are not, and should not, be interpreted as an offer to buy or sell any of the securities named in these materials. Past performance is not necessarily an indication of future performance. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Further, since the trades have not actually been executed, the results may have undercompensated or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Both long-term trading and "day trading" have potential rewards, as well as large potential risks. Trading may not be suitable for all users of this site or the information provided by this service. The user assumes the entire cost and risk of any trading they choose to undertake. Any reproduction, retransmission or redistribution of any information, news and reports provided by The Davian Letter or davianletter.com is strictly prohibited. Limitation of Liability Under no circumstances, including, but not limited to, negligence, shall The Davian Letter or davianletter.com be liable for any special or consequential damages that result from the use of, or the inability to use, the materials in this site, even if The Davian Letter, davianletter.com, or their authorized representatives have been advised of the possibility of such damages. In no event shall The Davian Letter or davianletter.com have liability to you for any damages, losses, and causes of action (whether in contract, tort (including, but not limited to, negligence) or otherwise) exceed the amount paid by you, if any, for accessing this site or using the information provided. License Disclaimer Nothing on The Davian Letter website shall be construed as conferring any license under any of The Davian Letter or any third party's intellectual property rights, whether by estoppel, implication, or otherwise. Sugar No.11 Focus P a g e | 10

Sign up to vote on this title
UsefulNot useful